For many investors, the opportunity to use their money in an ethical or environmentally friendly way has much appeal.

Ethical investing has traditionally taken the approach of screening out those companies which cause social harm. This negative methodology has resulted in far more firms promoting their positive practices, notably in sustainability and how their activities have a good impact on society.

In the past, ethical investing was associated with lower returns than non-ethical peers even operating in the same sector. Yet, with more focus on businesses which promote sustainable practices, the performance gap has closed. The choice has widened sufficiently that a broadly balanced portfolio can now be created with equities and other assets, such as bonds.

This has enabled funds to omit firms operating in the alcohol, arms, gambling and tobacco trades but purchase companies involved in environmentally positive areas or with good records of corporate responsibility.

However, Martin Payne, Leeds-based director of wealth manager Brewin Dolphin, cautions: “It is important to consider that just because a fund is classed as ‘ethical’, it might not necessarily follow the same ethical guidelines that an individual investor would want to see.”

Recently, AXA Investment Management and Aviva Investors divested all their funds from the tobacco sector. Both firms belong to groups with major life insurance interests and it was felt this created a conflict of interest.

Some collectives operate on a ‘best in class’ basis. It is therefore quite possible to find investments in the oil and gas markets, mining or even the defence industry within an ethical fund.

Jason Hollands of Tilney, which advises Saga clients, prefers funds where an independent committee of external experts defines the ethical criteria, leaving the fund managers to select investments. BMO has such an approach on the F&C Responsible range with the Archbishop of Canterbury sitting on its committee.

One approach is to back ventures which financially support communities where even basic infrastructure is lacking as well as to help access education and health.

The financial community refers to two groups in this context: environmental, social and governance (ESG) and socially responsible investment (SRI). It is a thematic investment, like resources or technology, and can effectively increase risk as the investor will only be buying certain sectors or stocks. This means exposure to more volatility when measured against a broad index.

Charles Stanley brokers ask clients if they have specific requirements and prefer or avoid certain areas. Jonathan Baker, investment director, says many like to follow the Church of England investment policy which typically states that as long as a business derives less than 10 per cent from, say, alcohol sales, then it is fine and usually no direct armaments.

Baker says the sector is growing and tips both Greencoat Wind and Robeco SAM Sustainable Water.

Alquity is one fund management house where a proportion of earnings is donated to countries in which it invests. It opts predominantly for emerging or developing markets and seeks to raise the living standards of those populations via donations. Its Alquity Indian SubContinent Fund is an example where a quarter of the management fees are donated to help local communities. Apart from India, the fund has small holdings in Bangladesh, Pakistan and Sri Lanka.

Naeem Siddique, investment manager at broker Redmayne-Bentley, who tips Alquity, cites two other funds which look across the spectrum beyond developing economies: Hermes Global Equity ESG and Stewart Investors Worldwide Sustainability Fund. The former seeks long-term value by engaging with companies whilst the Stewart one has shown success applying its sustainability framework to global equities.

It is invested 27.5 per cent in financial services, 24 per cent in consumer cyclical and 17 per cent in technology. In the last five years, its performance has been positive in four: 27.9, 14.7, 12.9, -8.0 and most recently up 16.8, all per cent.

The fund is ‘vegan-friendly’ with a strict approach not only to animal testing but animal products such as meat and leather are excluded.

Jupiter Ecology is tipped by Payne. It invests in companies worldwide which respond positively to the challenge of environmental sustainability as well as being committed to social well-being. The fund naturally has a bias towards the mid and small cap markets and shows a major divergence from mainstream indices like the FTSE 100 and FTSE World. It is mainly invested in developed markets with almost 80 per cent held across Europe and the US.

Apart from Kames Ethical Equity, Kelly Kirby, chartered financial planner at Chase de Vere in Leeds, recommends F&C Responsible UK Equity Growth for its engagement with companies and seeking firms that make a positive contribution to society and the environment, whilst avoiding those with damaging or unsustainable business practices. Its two largest holdings are HSBC and GlaxoSmithKline.

Another approach is taken by the Renewables Infrastructure Group, a £1bn investment company which launched in 2013. It invests in onshore wind farms and solar parks across the UK, Ireland and France, aiming for 8-9 per cent annual return. Payne says the 6.25p ordinary dividend last year equates to a 5.7 per cent dividend yield.

The company is managed by InfraRed Capital Partners which formed the UK’s first listed infrastructure fund (HICL Infrastructure) in 2006.

Payne says its management team has a “good track record”. It is currently borrowing (gearing) around six per cent with an 11 per cent discount to asset value.

Apart from shares, there are some good quality ethical fixed interest funds. Rathbone Ethical Bond is tipped by Kirby. It pays a competitive four per cent yield and invests in bonds not usually seen in other collectives, such as a UK charity which supports disabled people and their families, a not-for-profit company focusing on social housing and a mentoring programme for ex-offenders with social housing associations. The £630m fund has 172 holdings.

Another approach is to use an ethical bank, notably the Co-operative but also Triodos, whose head office is in The Netherlands but has had a UK presence for 22 years with offshoots in Belgium, France, Germany and Spain. It promises to only lend to people and organisations which make a “positive impact, culturally, socially and environmentally”.